China HNTE Tax Incentives to Promote High Tech Innovation

The evolution of Chinese manufacturing from being a low-cost budget sector to becoming a high-end producer is the key focus for the Chinese government. Their strategy for doubling down on the encouragement of investments for research and development (R&D) into high and innovating tech products and services is well underway.

A major component of the move is the direct competition of the US in regards to the design and development of new tech products and services. And because of this confrontation with the US, China now sees the investment in its technology sector as being strategic, which means more support, financially and logistically from the government.

This has had a knock-on effect on how the Chinese government offers tax incentives to encourage and support technology innovation. We will cover these incentives and preferential policies and their benefits in this article.

Understanding High and New Technology Enterprises (HNTEs)

The term HNTE is an acronym for High and New Technology Enterprises, and it’s essentially a tax incentive policy that reduces Corporate Income Tax (CIT) rates from 25% to 15%. The incentives were created to encourage innovation.

Aside from the lowered CIT rate that came into place on 1 January 2018, there is an additional preferential tax treatment for HNTEs as follows:

Any financial losses that the HNTE had during the 5 years before the year before they became qualified as an HNTE that have not already been made up, can now be carried forward to years into the future that is less than the 10-year maximum. Standard enterprises get a carried forward period of only 5 years in comparison to HNTEs.

Once the enterprise has become a qualified HNTE, it can take advantage of all the preferential treatments starting from the same year that it received the HNTE certification.

HNTE Qualification Criteria

Before we go any further, let’s take a look, as follows, at the criteria enterprises need to fulfill to qualify for HNTE status:

  • For at least one year, the enterprise must be registered in China, excluding Taiwan, Macao, and Hong Kong.
  • They must own the IP intellectual property rights for the core technology they use or for key products or services that are the cornerstone of the business via independent R&D, mergers and acquisitions, transfers, donations, and so forth.
  • Any core technology that is the main product or service of the enterprise needs to fall under the regulatory requirements that are listed in the Regions of Advanced Technologies Strongly Supported By The State. And this has over 200 categories that cover a wide range of 8 tech areas.
  • There needs to be at least 10% of the total number of employees of the enterprise that are engaging in R&D or some kind of technological research or innovative activities.
  • During the previous 3 financial years, which in some cases is a normal operational period for newly established enterprises, the R&D expenditure should only be a certain percentage of the sales that were made during that same period.
  • It needs to ensure that there is no less than 5% of its current annual sales figure is less than RMB 50 million (roughly USD 7.7 million).
  • It needs to ensure that there is no less than 4% of the current annual sales figure between RMB 50 million and RMB 200 million (roughly between $7.7 million USD and $30.8 million USD).
  • Ensure that your R&D expenses in China are at 60% of the R&D total expenditure and not less than.
  • Keep the ratio of income that comes from technology-related operations against the total income should not be lower than 60% from during the current period.
  • The innovation capacity evaluation of the enterprise needs to satisfy the proper requirements.
  • No major safety issues or quality incidents or even environmental issues in the past year before the application.

HNTE China Application Process

All enterprises that seek HNTE qualification must go through the application process that begins by submitting the prerequisite documents to the relevant authorities. They will need to undergo certain assessments and processes to get the job done correctly.

There is an administrative authority that’s in charge of the application and accreditation of HNTEs (we will call these the HNTE accreditation authority from this moment). This authority was formed by the provincial-level science and technology administration and management authority. This sector works in tandem with the provincial level tax and finance authorities. The HNTE accreditation authority is on the provincial level and is fronted by the Leading Team for Administration of Accreditation of HNTE Nationwide (we shall call them the National HNTE Leading Team from hereon).

Step 1 – Enterprise Self-Assessment and Application

The first phase of the application process should be a self-assessment by the enterprise in line with current HNTE criteria. Once the criteria are met, the enterprise needs to register on the Network for Administration of Accreditation of HNTE. You will also need to submit other documents that prove the qualification such as anything related to IP, any statement detailing info on the enterprise’s current staff and any technical personnel, and any financial reports from over the past three years.

Step 2 – Get an Expert Assessment

Experts will be selected by the HNTE accreditation authority who they trust to reply to carry out the evaluation and to form a panel of experts. From there, the panel will evaluate the enterprise’s declaration materials so they can offer an expert opinion on the evaluation.

Step 3 – Public Comments and Review

The applicants will be examined by the HNTE accreditation authority who shall take info from the expert evaluation panel and submit its opinion to the National HNTE Leading Team department. There will then be a public announcement from the accredited HNTEs that will be put for 10 working days on the Network for Administration of Accreditation of HNTE.

Step 4 – Certification and Accreditation

As long as no issues or objections are made, the HNTE list will be filed and announced directly on the Network for Administration of Accreditation of HNTE. The enterprise will now receive a standardized HNTE Certificate. But if an objection is made, the accreditation authority will most likely still handle it and verify.

It should take a turnaround of approximately 60 days if everything is correct and in order. Once accredited as an HNTE, the enterprise is valid for three years from the date that the authorities issued the HNTE certification.

Follow-Up Administration and Supervision

Once accreditation for HNTE is complete, the enterprise still has issues to deal with. They will need to submit info regarding their IP, R&D expenditure, tech personnel, operational income, and so forth. This will have to be completed via the Network for Administration of Accreditation of HNTE every year before 31 May.

If the enterprise changes its name or makes massive changes to accreditation criteria, it needs to be reported within three months to the HNTE accreditation authority. The authority will examine the changes, and as long as you’ve adhered to the previous accreditation criteria, no changes will be made to the HNTE qualification. But if enterprises fail to report the changes within the three months, or if they fail to submit any annual reports on their development status, the HNTE qualification will probably be revoked.

Also, if an accredited HNTE is not fulfilling its day-to-day administration in line with the HNTE criteria, the relevant authorities might well ask for a re-examination of the enterprise. If the enterprise is found to be non-compliant upon re-examination, the HNTE qualification could be revoked, and in most cases is. The relevant authorities will notify the tax authorities and the incentives that the enterprise claimed during its time as an HNTE will be recovered.

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